How RBI's New Rules Tighten The Noose On Home Loan Sanctions, EMIs Also Likely To Increase | Explained

The Reserve Bank of India (RBI) new regulation on loan can decrease the eligibility of borrowers and can also compel the banks and financial institutions to increase equated monthly installments (EMIs) for selective home loans in response to rising interest rates.

As per the new norms, banks will now be required to provide borrowers with the option to switch to fixed rate loans during the interest rate reset phase. Furthermore, loan sanction letters will now need to mention the cost of transitioning from floating to fixed interest rate in the future.

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It further said that the lenders will be required to ensure that even in the event of significant rate hikes, the EMIs will continue to cover the monthly interest payments, preventing any increase in the outstanding loan balance from the previous month after the EMI is paid.

The RBI’s circular also mentioned that lenders need to make sure that the repayment capacity of the borrower is based on prevailing interest rates but also need to ensure that the borrower can meet their payment obligations even if interest rates hike.

According to several media reports, interest rates have experienced intense fluctuations of up to 6 percentage points within a single loan cycle, which led to an increase in interest burden sharply, further pushing the rise of loan tenure by years.

The new regulations require lenders to evaluate repayment capacity at a rate higher than the prevailing one. Currently, banks determine borrowers repayment capacity based on the prevailing interest rate. Most banks currently don't offer fixed-rate loans due to short-term deposit structures.

“Regulated entities are required to take into account the repayment capacity of borrowers to ensure that adequate headroom/ margin is available for elongation of tenor and/ or increase in EMI, in the scenario of a possible increase in the external benchmark rate during the tenor of the loan," the RBI said.

RBI governor Shaktikanta Das, last week, said that the central bank would address the concerns by banks unduly extending home loan tenures post interest rate hikes and will also review EMI norms.

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The new rules, effective December 31, 2023, apply to both new and existing borrowers. They enhance transparency by necessitating the disclosure of principal and interest recovered to date, remaining EMIs, EMI amounts, and the annualized rate of interest/Annual Percentage Rate (APR) for the entire loan duration.

Experts believe that increase in EMIs and home loan rates would reduce affordability in the real estate sector. 

“The RBI’s extremely capable handling of the inflationary scenario has inspired confidence in the country’s economic environment. This is also reflected in the residential demand which is at a multi-year high and office demand which has remained resilient even as office markets globally have been struggling. The mid and premium segments in the residential market have been consistently outperforming and points to a significant shift in the market’s underlying fabric. However, the 250 bps increase in policy rates has reduced affordability across markets by 2.5% on an average. And, while the market has remained strong thus far, further interest rate increases could put pressure on homebuyer ability and sentiments,”  Shishir Baijal, Chairman and Managing Director, Knight Frank India said.